The change of circuit parameter caused by variable temperature is an important element that affects the accuracy of photoelectrical encoder. The mechanical deformation of encoder the characteristics of infrared-LED and temperature characteristics of recieving detector will vary with the change of ambient temperature. This variation will change the amplitude of the encoder’s output signal and bring measurement errors, especially for amplitude breakdown high-precision encoder. A method of temperutre compensation is proposed, which can automatically compensate the variation caused by the variable temperature and stabilize the amplitude of output signal in a wide temperature range about -40 ℃～+80 ℃. Experimental results show that the amplitude signal change of a 21-bit encoder at 65 ℃ is 20%, and the amplitude signal change is 3% after adding temperature compensation.